Union Budget 2016: Not Employer But Government Will Contribute 8.33% to EPF Accounts of New Employees
Finance Minister Gives A Good Reason to Employers for Creating Jobs
It seems like Modi government is in the mood of doing everything that it can to make doing business in India as easy as possible. At least its Union Budget seems to be saying so. Among a series of benefits announced today for employers was also a benefit that’ll ease some part of their financial burden. A benefit that’ll help them save money – a benefit related to EPF contributions.
Under current arrangement around 12% of an employee’s salary goes to his EPF account and employer also contributes the same amount. However, only 3.67% of that contribution go to employee’s EPF account and rest 8.33% is diverted to Employee Pension Scheme (EPS).
Now government has decided to change this scenario and make things a little easier for employers. And for that thing it has prepared a two step plan. The first step of new plan is to completely eliminate EPS coverage for those who earn more than Rs. 15,000. This change is effective from September 1, 2014.
In the next step government will take over some of the burden from the shoulders of employers. The 8.33% contribution that employers make to EPS will be provided by the government for first 3 years of every new employee that they hire with a salary of less than Rs. 15,000.
While making the announcement Mr. Jaitely said that government wants to incentivize the companies for creating new jobs, so it’ll pay 8.33% of EPF to the accounts of new employees for first 3 years after their employment rather than employer having to pay it. A fund of Rs. 1,000 crores has been set up to finance the scheme.
And if you’re an employee reading this, given below is the formula that you can use to calculate your pension under EPS:
(Pensionable salary x service period) / 70 = Pension
The cap of pensionable salary is Rs. 15,000 and cap of service period is 35 years. And according to these limits, the maximum pension that anyone may avail under EPS is Rs. 7,500 per month. However, for majority of employees to whom employers been contributing for more than 5 months (earlier than September 1, 2014) it’ll be much less than that because cap of pensionable salary at that time was Rs. 6,500.
Notably, government had recently made following changes to Employee Pension Scheme, aka EPS:
|Wage Ceiling||Rs. 6,500||Rs. 15,000|
|Period used to calculate average salary for pension||12 months||60 months|
|Contribution to employees having salary higher than wage ceiling||Allowed||Not Allowed|
Employers who have been contributing this 8.33% to accounts of employees with salaries higher than wage ceiling now must prefer the fresh options and contribute 1.16% of wages exceeding the ceiling in place of government’s contribution.
It’s worth remembering that Jaitely had noted ease of doing business as one of 9 pillars that can transform India. Great to see that his budget also falls inline with his words – now all we need to do as employers is capitalizing on it.